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Boston, MA -- (SBWire) -- 06/18/2013 --Malaysia's economy grew by a better-than-expected 6.4% year-onyear (y-o-y) in Q412, bringing full year growth to 5.6%. The latest GDP reading is closely in line with regional economic data, which reflected resilient private consumption and evidence of a recovery in external demand across South East Asia. However, we maintain our forecast for real GDP growth to come in at a relatively subdued 4.6% in 2013, reflecting our view that the Chinese economy will witness a slowdown in H213.

We believe that falling producer prices, slack labour market conditions, and moderating money supply growth, will keep inflationary pressures in check through 2013. Although moderating money supply growth may provide scope for a rate cut, we believe that it is more likely to keep a neutral stance on monetary policy given that fiscal spending will pick up significantly in 2013 to support overall demand. Accordingly, we expect Bank Negara Malaysia (BNM) to keep its policy rate on hold at 3.00% throughout 2013.

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Latest figures published by BNM showed that Malaysia ran a budget deficit of 4.5% of GDP in 2012, slightly smaller than the 4.8% deficit recorded in 2011. Although we acknowledge that Malaysia's fiscal position has improved in recent months, we highlight that this has mainly been due to a substantial increase in oil-related revenues. We forecast Malaysia's fiscal deficit to increase to 5.0% in 2013 before we begin to see a gradual narrowing of the deficit towards 4.3% and 3.6% in 2014 and 2015.

Major Forecast Changes

We have revised up our forecast for real GDP growth from 4.2% to 4.6% in 2013 to reflect the better-than-expected economic data in recent months.

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